VCs playing mobile gaming space

The mobile gaming sector has witnessed some of the most successful financings and exits in the last 5 years. Games like Clash of Clans (Supercell), Game of War: Fire Age (Machine Zone) and Candy Crush (King Digital Entertainment) are said to be generating over $1 million in daily revenues, with their respective parent companies’ valuations each reaching or eclipsing $3 billion. Dating back to 2006, the amount of completed VC deals in the space has grown by about 307%, with 175 financings taking place in 2014 compared to just 43 in 2006. 2014 also saw over $1 billion of capital invested in the space compared to just $513 million in 2006, a roughly 107% jump, according to the PitchBook Platform.

The uptick of capital invested into mobile gaming appears to have underpinned the valuations these young companies have been able to garner. This, in part, can be attributed to the success that predecessor mobile game developers have been able to achieve, at least from a fundraising effort. One prominent example is Machine Zone, creator of the Kate Upton-endorsed Game of War, which raised $5.3 million at a nearly $44 million post valuation in 2011 before raising $8 million at an $81 million pre-money valuation just three months later. The developer then went on to raise $377 million at a pre val of more than $2.7 billion last September, representing a post-to-pre valuation step up of 30.6x, the largest increase of any VC-backed company raising its Series C round since 2008.

The valuation step-up that most mobile gaming companies (MGCs) tend to experience appears to happen fairly early in their VC lifecycle. Median Series A step-ups dating back to 2010 for MGCs came in at 1.73x, compared to just 1.39x for VC overall. Below you can see a visual of median step-up multiples for VC-backed MGCs relative to the entire VC landscape.

Since 2011, investors have poured an increasing amount of capital into MGCs, primarily at the Series A and Series B stages, which saw 59% and 89% increases in median round size, respectively (compared to seed investments, which have stayed relatively flat). As growing MGCs continue to generate increasing levels of daily revenues, many of these companies must look to use their growing earnings efficiently. While a significant portion of that capital will undoubtedly be used to develop new games or to return capital to shareholders, increasing M&A activity leading to VC exits and consolidation in the space would not come as a surprise. This notion may serve as a driving force behind investors willing to write these companies larger and larger checks as they are betting on the aforementioned lucrative exit opportunities in the near future.

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